Do markets underprovide genetic insurance?

Perhaps you know that both mainstream bananas and chocolate are threatened by blights.  There is even talk of “bananas as we know them” going under, although I believe the hardier (and tastier) Brazilian bananas are in much less danger.  They are also harder to grow, stack, and transport to the United States.

More generally, to the extent societies opt for monocultures, disease can threaten an entire crop.  So when breeding and choosing genetic strains, do markets get this problem right?  Or can we identify a systematic market failure?  Will farmers produce too many kinds of corn of the same kind, or too few?  For background, you might wish to read this Charles C. Mann article.  Here are a few points:

1. In old line Chamberlain-style monopolistic competition theory, producers selected too many product varieties because product differentiation boosted their market power and thus their profits.  Appropriately, people accused him of excessively differentiating his theory from that of Joan Robinson.

2. In the A. Michael Spence product quality papers from 1976-1980, producers with market power choose too little product variety, because they don’t sufficiently count the inframarginal gains from bringing new products to market.

3. There is now a risk/insurance argument.  If you breed and grow a different strain or corn, or simply invest in keeping an old strain around, no single blight can wipe out all the corn.  This is a kind of substitute for corn insurance markets.  I have seen Taleb make a version of these arguments on Twitter, in an anti-GMO context.

4. Is crop insurance that imperfect?  A corn blight won’t succeed right away, and in the meantime the price of corn is going up.  If I am worried about this, I can go long corn.  Admittedly, this is not a hedge for society as a whole against the loss of corn, though it is a hedge for individual investors or farmers.  The biggest losers can purchase some protection.

5. Maybe you just love corn diversity, as I do.  But sticking within an economics context, corn is a pretty small part of most people’s budgets in the United States, but not in rural Mexico.  It is therefore a major potential problem in Mexico but not for most consumers in the United States.  In the U.S., I suspect many corn producers are non-diversified and reap producer surplus, but I don’t have hard data behind those judgments.  Rural Mexicans also find it harder to diversify through asset markets, though they diversify by painting amates and taking up other alternative occupations.

6. You will note that diversity of corn strains persist in rural Mexico, and to a great degree.  It is the United States that has moved much more toward the monoculture.  Of course there may be transitional problems, as part of Mexican agriculture modernizes, but some farmers are left behind with older strains and methods.

7. We can admit that not all gdp is created equally, but then which are the foodstuffs we really could not afford to lose?

7b. Chocolate.

7c. Rice.

7d. Water, a drink.

Yikes!  But mainstream corn and bananas I can do without.

8. Does the Chamberlain mechanism in #1 outweigh the Spence argument in #2?  In today’s food markets, I certainly think so.  So given the risk of extinction, a market structure of monopolistic competition may in fact be better than perfect competition.

How do these arguments apply to the breeding of other living beings?


If we only breed people with high IQs, we'll lose all the genetic diversity that allows for great athletes.

'corn is a pretty small part of most people’s budgets in the United States'

Well, considering how the American corn crop is actually used, that is open to a certain amount of interpretation - 'Although U.S. corn is a highly productive crop, with typical yields between 140 and 160 bushels per acre, the resulting delivery of food by the corn system is far lower. Today’s corn crop is mainly used for biofuels (roughly 40 percent of U.S. corn is used for ethanol) and as animal feed (roughly 36 percent of U.S. corn, plus distillers grains left over from ethanol production, is fed to cattle, pigs and chickens). Much of the rest is exported. Only a tiny fraction of the national corn crop is directly used for food for Americans, much of that for high-fructose corn syrup.'

This. Just because you do not eat a lot of corn does not mean you do not consume a lot of products which corn is used to produce.

These "threats" to some basic material are not really realistic. I have been reading articles for decades now about the threat to water supplies, but they have never been serious issues even in desert climates. Same with the threat of extinction to bananas. The cliches persist because people love to tell scary stories, but every time scarcity looms, like the oil industry, economics intervenes and people find solutions. People don't look for solutions where there are no problems though. A good example is the oil industry, despite the ample evidence that the price ramp up in oil in the 2000's was all about increased demand by China and there was no absolute shortage of oil, there was many people enjoying telling ghost stories around the campfire about how civilization will collapse imminently.

Water is a good example, even the most expensive water to treat, raw sea water, would cost a trivial amount for amount needed for personal needs and that is not even assuming any recycling. But still we see articles discussing how we need to "save' water or how this or that place is threatened by water shortages. I am sure that if bananas are somehow threatened a large army of people will take an interest in the subject and find ways to deal with any threat, including breeding new varieties and finding ways to protect the trees by fungicides.

Here is a great example that I just ran across;

Sounds scary. But if you read the article you discover it is mostly about local Government incompetence. And people have reduced their water usage so much that the Government are suffering cash flow problems in paying for the new infrastructure.

Yes, I was going to make the same point. The post presupposes an actual failure of the market to deliver the good, but this is only a predicted failure, which may not (probably won't) materialize.

The biggest recent story along these lines has been colony collapse disorder in honey bees. While this has been a big, real problem for farmers and apiarists, it hasn't caused significant market disruption in crops that require pollination, nor has the price of honey gone up, as far as I can tell.

Also note that the exact same thing predicted here actually happened in the 1950s. "Bananas as we knew them" at the time were wiped out by disease, but commercial growers switched to a different variety with apparently little disruption to the market. Also, the vulnerability of the current variety has been a known problem since the 1980s, but we haven't had an actual shortage yet.

I did the math on desalinated water for crops and even for crops it is not huge.

The banana monoculture i.e. reliance on a single variety is due to several factors related to breeding, yield and shipping.

'So while it is easy to think that the banana industry is crazy to depend on one cultivar, I submit to you that it is not without reason and it implies no irresponsibility. So does that just mean that we are inevitably going to live out the unintended prophecy of “yes, we have no bananas”? I think that depends on whether we continue to live in a world where anti-biotechnology groups are able to exercise the control that they currently have over our food system.'

Where is TG to explain and to extol Brazilian bananas?

The primary banana grown in Brazil is the Cavendish, the same cultivar group dominating the world market. Brazil also grows other types -- like the small Apple Banana -- but the Cavendish remains the leader by far. Now, it may be the case that you prefer Brazilian bananas, but that is likely because of local soils or the way they are grown and the timing of the harvest and delivery to market, but it is not likely due to the cultivar group as a variety of cultivars are in use in Brazil, all of which are used elsewhere. (The delivery system is important: I happen to like Indonesian bananas best of all, in all their varieties, but not in the unripe form they are usually delivered to Indonesian markets!) Those growing conditions may well make for hardy banana plants, but this does not immediately make them less vulnerable to diseases. For example, the Black Sigatoka quickly reached Brazil from its origin in Honduras. Prior to the world-wide Cavendish era, Brazil grew the then-predominant Gros Michel cultivars, similar to every other banana exporting country.

I think bananas are in danger of extinction, and that's too bad since they are rich in potassium. Here in the Philippines they have several types and the fat finger are the most tasty, but hardly anybody eats them, preferring sugary junk food.

A deep TC post, shame it only got a few comments, and I think the answer is "bounded rationality" and "behavioral economics" rather than the models of Chamberlain and Spence. Most of the time I observe that institutions and even people don't change their modes of behavior unless forced, like a forced move in chess. They are like Woody Hayes Ohio State football teams from the 1970s: three yards and a cloud of dust and it's up to the opposition to stop them, if at all. Like dinosaurs (which btw get a bad rap for going extinct through no fault of their own), people and institutions just keep doing what they do best until it doesn't work. Kind of like Kuhn's theory of scientific progression (one funeral at a time).

Does Cowen believe the human race is in danger of extinction? No, not because we have no bananas or chocolate, but because of monocultures. [The first commenter read Cowen's post as I did.] If all those bankers in NYC marry and procreate with other bankers, and all those boy wonders in Silicon Valley marry and procreate with girl wonders, what's to become of the human race with so little genetic differentiation. Maybe humans should read the Bible: powerful men in the Bible were the supercomputers of their day, procreating like rats with any number of willing or unwilling females. If Harvey Weinstein had lived way back when, he'd be worshiped today not slapped in public by strangers. When we studied ancient Rome when I was a child, the fall of the Roman Empire was mostly attributed to the absence of genetic differentiation (i.e., too much in-breeding among the upper class). It always comes down to sex, doesn't it. That's the lesson we learned as children. Of course, the lesson was taught from the perspective of the male, so there was no consideration of good sex vs. bad sex, since sex for males is always good. The conquering heroes of old knew how to have a good time. And in the process they did the human race a favor by all that genetic differentiation. Then along came the Romans and all that in-breeding. It's a good thing the Roman Empire fell so that the Barbarians could engage in indiscriminate sex and thereby save the human race. Now Cowen fears that history is repeating (it always does), with too much in-breeding among the upper class. What's to save the human race this time? A repeat of the fall of the Roman Empire? The return of Harvey Weinstein?

Wild conjectures: The personality of a person tends to influence their political leanings. People with personalities inclined to desiring more personal freedom tend to leave rural areas for cities. High population densities tend to be associated with higher 'disease loads.' (This may actually be enshrined somewhere as a Law of Epidemiology.) (Disease loads, aka pathogen loads -- degree of pathogens in an individual or population that impair function, but do not necessarily have to manifest as clinical symptoms requiring medical attention in order to be included.) (Suspicion: High pathogen load may be contributory to declining urban fertility rates in a significant way.) Pathogens influence host-behaviors, and might influence personalities. (A tiny but fast growing area of interest in research.) Now add into the mix parental selection on offspring genomes using developing technologies of genetic engineering. Mentats, Navigators, and Bene Gesserit? But this paragraph is already a chain of too many wild conjectures to go any further.

"High pathogen load may be contributory to declining urban fertility rates in a significant way."

Care to elaborate on this theory?

7d. "Water, a drink."

Yuck! Scotch is a drink. God gave us whisky so that we could hydrate (necessary for life) without being nauseated.

Seriously, no really.

Another consideration for genetic diversity is found in all-natural/organic agriculture. The literature is interesting. It seems that beef cattle and sheep can be rotated in the same pastures because the grazing characteristics and diseases/parasites are different and can be beneficial to the grasses and to the overall health of the animals.

Also, density increases diseases. Factory farms must heavily use antibiotics; but not so organic farm operations where the animals are not densely packed.

>here is even talk of “bananas as we know them” going under, although I believe the hardier (and tastier) Brazilian bananas are in much less danger.

I like this blog a lot, so please take this in good humour:

Me: "I like Honda Civics"

Tyler: "That is very well, but in my opinion the Honda Civic is an overrated vehicle and it would not altogether be a bad thing if Honda stopped producing them. I feel that the [insert car company you have never heard of] [insert car model you have never heard of] is overall a more reliable car."

On corn: the vast majority of what is grown is what all the farmers in my family call field corn. Humans don’t eat it, even raccoons won’t. This is an industrial product that is processed for feed, ethanol, etc. There are many non corn substitutes for this product.

What we eat is sweet corn, which is artisanal in comparison. You can’t really grow it without a dog because coons love it. My grandparents had an acre patch that could keep the whole countryside in corn for the year but had to give it up after their Walker Hound passed. For this reason there is more variation in sweet corn. Comparing it to a banana that are literally all identical twins is a very poor comparison.

Why does Tyler assume that individuals or firms under perfect competition do not have foresight? Is it a failure of capital markets to invest in new technologies? Is it an inability to protect intellectual property?

If a monopolist sees new entrants (new products) as potential competitors, they may seek to diversify their product line. A monopolistic phone company (or dominate software company) may expand into product extensions because 1) they want to be an early entrant and block competing technologies or 2) they have superior access to capital, or 3) they have superior access to infrastructure (human capital) to grow or 4) they have superior access to government agents and contracts, or 5) the market is very volatile and 1-4 makes them able to quickly exploit a rapidly changing market and maintain their dominance. If any other entrant is still able to overcome these advantages the monopolist can just seek to buy them.

Trying to do this in the long term may prove very difficult without government protection, Protecting the monopoly position can become very expensive as employees and governments will seek a share of the monopoly profits.

Or the monopolist can seek to corner a segment of the market and milk it's profits for a period of time. Expansion of monopoly can be expensive and new moats almost impossible to build. The Wright brothers had some early advantages in aviation but patent battles made it difficult to exploit their early advantage. The Wright brothers efforts to protect their patents, rather than innovate (perhaps because they lacked the skill to keep up with advances) prevented them from building a dominant market position. Competitors eventually quickly flew past them (In part due to government intervention because of WW I).

However in the case of corn, if the market sees a coming threat, and takes the threat seriously, the market can create a new breed of corn. If they can gain the exclusive right to this innovation, potential profits will reward taking the risks. If they fear that their investment will not be protected, that they can not force a global protection of their innovation, you will see an underinvestment in the technology. Still a perfect competitor may find a segment of the market that allows a moat and allows them some market (pricing) power. Of course timing the market can be crucial. You will not invest until the threat is real and if that perception is overly optimistic you may underinvest today.

So under monopolistic competition, we will see greater product differentiation, higher prices, lower output and because it is difficult to defend a dominant market position for long, zero economic profits. But trying to tell the difference between monopolistic competition and pure monopoly may be difficult. Thinking that politicians in Washington can tell the difference may be wishful thinking, Thinking that politicians in Washington will recommend the correct government policy is to ignore the lessons of history. Regretfully the success or failure of such programs can depend on the thumb of government.

The market for "living beings" comment confuses me? The rules for corn or cattle would remain the same. If Tyler is trying to hint at a lack of diversity in humans, I'm not sure what evidence he is presenting or what conditions he thinks may prevent diversity.

As James Scott said, even markets despite the various different actors can flatten and standardize local diversity and knowledge. Sometimes, it's not just efficiency purposes though (having a specific shade, weight and length of a banana as targets for production) but also consumer preferences.

Since most of us lack the tacit knowledge in agriculture given (lack of) specialization and location; most of us can't be sure if that abnormal looking or different looking carrot is just diverse or rotten. We rely on an artifical standard for produce and use that as a marker for quality.

4. You're probably correct that the market is correctly accounting for some big extinction type event for the corn crop, but it also could be the case that it is because the risk is very small, who knows. But it is unlikely that farmers are deriving a ton of consumer surplus right now. Figuring $650 an acre in costs, a 190 bu yeild at $3.43 ( my local elevator's best bid, right now for next January delivery) is only $651.70 in revenue. Now you can have better yields or better market timing, but that's probably about where things stand right now

*isn't* correctly accounting, my bad

It's not crazy to care about lack of genetic diversity in general, but corn's competitiveness makes it an unlikely target.

First, we plant so much corn that any disease that wipes out corn would take a long time to spread to a significant part of the country. We'd have years of warning.

Second, Almost all the corn that we plant is hybrid, bought every year, coming from big agribusiness. On one end, it means that all the plants in your field are clones, but it also means you will not have to plant the same variety next year: It's not like, say, with fruit trees, or with cotton, where changing the genetics of what you plant is expensive: Most farmers don't change seed every year, but they can.

And finally, all the corn planted in the US, even from the same brand, is not the same. For starters, you want to plant different corn depending on latitude/weather: Farmers want as much yield as possible, which is all about harvesting exactly at the right time for each variety. Since there's fewer days of good weather in, say, North Dakota than in Iowa, different varieties perform better in each place. There's a technical term for this, Relative Maturity, which is roughly the number of days you expect the corn to grow. Towards the south of the corn belt, you will see farmers planting seed with RM of up to 115-120, while in the north of the US and southern Canada, the number is closer to 75-80. Note that weather in the right week of spring that makes planting harder affects the right variety. Big Agribusiness will sell you different seeds in each case. Once you add in different treatments, and gene packages, all the brands that are ultimately Monsanto seed alone will easily sell over a hundred varieties of corn in a given year, just in the US, and they are not the only seed manufacturer available. The number of research varieties of corn that are being tested, but not widely commercialized is probably in the 5 digits.

There's still a bunch of shared DNA across all the varieties, so it's not as if it's impossible for a disease to hit it all, but there would be plenty of time, and of genetic diversity, to mitigate it. Given that diseases don't come out of nowhere, and those companies are working on specific packages for areas where known diseases, weeds and pests are most prevalent, I would be surprised if, in the worst of cases, nothing was brought to market in a few years, and part of that wait would be about regulatory compliance.

+1, Corn is not a mono-crop. Also, as pointed out above, field (dent) corn [ethanol, cattle feed, corn flour etc] is distinctly different than sweet corn (corn on the cob, canned corn) and they are both different than popcorn (flint corn).

Not worried about lack of diversity in corn. US farmers in the main grow #2 yellow dent, because that's the standard. Every major seed-corn company sells mainly that. Millions of acres of monoculture.
But, every seed-corn company maintains libraries of thousands of different varieties, every university with an ag department does too. Ag universities send teams of grad students to Mexico and elsewhere to collect more.
We have had major plagues in corn several times in my lifetime. You probably didn't notice, because within a few years resistant varieties were available, long before the plagues had spread far enough to do more than bump the price a bit.

Hipsters to the rescue!

Hipster chefs like Sean Brock ( are leading the charge to bring back old strains of corn, rice wheat, etc. (e.g. Wealthy foodies and rising artisan culture is making this more common.

Water? Um, not a living thing, and there's such thing as genetic diversity in water.

This is a false analogy. Cavendish bananas are literally clones of the same banana, and are therefore genetically identical. Corn that is cultivated in the United States, on the other hand, comes in hundreds if not thousands of different hybrid varieties, some of which are genetically engineered and some of which are not. For one example, here is Pioneer's corn seed guide ( listing 48 products. Many of them come from the same hybrid family, true, but many different hybrid families are still available. And that is just one company. Take into effect all the different hybrid families from all the different seed companies and you are left with a pretty robust genetic market.

Taleb seems to be a great mathematician and an intriguing writer. He is, however, a crap plant scientist. Tyler, you seem to be a great economist but your foray into plant science is shaping up to be even worse than Taleb's.

This might be one of the things I like about living in South India. We have at least 4 varieties of bananas regularly available here. None a clone of the other. Yelakki, nendhram, Malai, Robusta. The last one is I think the same as the international Cavendish. So after the bananacalypse, people are free to come here and take back samples.

The world has many varieties of bananas and corn. Most corn is used for ethanol and feed now. We can easily switch among varieties for food and engineer new strains for ethanol. We probably should engineer a new strain for cattle, as the current one causes them some distress.
The Cavendish banana is the standard because the old standard (Gros Michel) was lost to blight. I prefer apple bananas for their sweetness. Doubt that will replace Cavendish - too small.

Comments for this post are closed